In this Oct 27, 2017 photo, Chief Executive of Hong Kong Stock Exchange Charles Li Xiaojia speaks at an event to mark the end of floor trading at the Hong Kong Stock Exchange. Li is confident that moves to accommodate new-economy company structures will encourage startups in Hong Kong. (ISAAC LAWRENCE / AFP)

London Stock Exchange (LSE) Group Plc Chief Executive Officer David Schwimmer had a visit on Monday from an unexpected guest: Hong Kong Exchanges & Clearing Ltd. CEO Charles Li.

Schwimmer must decide between HKEX’s offer and his plan to acquire Refinitiv to become a global data powerhouse

In a hastily called meeting, the 58-year-old Li told Schwimmer and LSE Chairman Don Robert that he wanted to buy the three-century-old UK exchange, according to a person familiar with the matter, who asked not to be identified discussing a private conversation. The executives were caught off-guard, and were surprised when HKEX made an unsolicited bid for LSE less than 30 hours later, the person said.

Now Schwimmer must decide between HKEX’s offer and his plan to acquire Refinitiv to become a global data powerhouse. If he decides to fend off HKEX’s bid for his marketplace, he can count on some powerful allies. While the offer represents a vote of confidence in London as a post-Brexit financial hub which is also the world’s biggest venue for handling interest-rate swaps, officials in the UK and US are likely to look at it skeptically.

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“This news comes at a hugely sensitive political moment,” said Scott Colvin, head of public affairs at Finsbury, a corporate public-relations firm. “This plays into the Brexit debate and the imminent general election." 

Shares of HKEX fell 3.3% in premarket trading in Hong Kong. Citigoup analysts on Wednesday cut the exchange operator’s rating to sell from buy with a new target of HK$210 a share, writing that the high offer could weigh on HKEX’s shares in the near term, while there’s risk the deal won’t be approved by regulators.

Speaking to reporters on Wednesday, Li sidestepped a question about exploiting the weak pound, which has declined almost 20% since the 2016 Brexit vote. Instead, he touted the benefits of enabling two-way capital flows from East to West, “bringing together significant financial centers of Asia and Europe” and facilitating an 18-hour trading day.

“The London Stock Exchange is a critically important part of the UK financial system, so as you would expect, the government and the regulators will be looking at the details closely,” said a spokesperson for the UK government. “We cannot comment further on commercial matters.” The government has the power to intervene in mergers on public interest grounds.

Refinitiv

For its part, the LSE has already pinned its future on a world dominated by data with its US$27 billion bid for Refinitiv, the business that used to be Thomson Reuters Corp.’s financial and risk unit. It’s currently owned by a Blackstone Group Inc.-led consortium.

After the HKEX bid was announced, an LSE statement called the offer an “unsolicited, preliminary and highly conditional proposal” and said a further announcement would be made in due course.

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LSE senior managers were blindsided by the offer, said another person familiar with the situation who asked not to be named discussing matters that aren’t public. Internally, recent meetings have concentrated on the significant benefits of the Refinitiv deal, the person said.

LSE’s shares pared earlier gains, reflecting skepticism that a deal can be done. Under the proposal, HKEX would offer 2,045 pence as well as 2.495 newly issued HKEX shares per LSE share. That values each LSE share at 8,361 pence, the Hong Kong bourse said in its statement. The shares ended the day up 5.9%, but almost 14 percent below the offer price.

‘Security implications’

In London, UK Business Secretary Andrea Leadsom said the UK would “look very carefully” at anything with “security implications.” The British political class may also be unwilling to court controversy given the drama over delivering Brexit.

To be sure, Britain has sought closer financial ties with Chinese mainland and the UK’s biggest bank, HSBC Holdings Plc, generates more than half its profits in Hong Kong.

“The UK and even Theresa May went to China after the Brexit referendum was over, trying to lure them into a trading agreement,” said Karel Lannoo, CEO of the Brussels-based Centre for European Policy Studies. “Why would the UK all of a sudden oppose this?”

Political risk

HKEX made its bid now, after viewing this as the last opportunity to acquire LSE, said people familiar with the matter. If the British firm completes the deal with Refinitiv, it would be too big for HKEX to acquire, the people said.

Keefe Bruyette and & Woods analysts led by Kyle Voigt said in a note that the HKEX bid has higher political risks than the Refinitiv deal, and that LSE shareholders who view the Refinitiv transaction favorably see value creation well above the offer price. It said that the 14.5% premium to Friday’s close wouldn’t be attractive enough for shareholders to walk away from Refinitiv.

Louis Capital analyst Ben Kelly said he didn’t expect a deal to be consummated, citing likely political opposition.

History is littered with failed attempts to complete cross-border exchange mergers, including at least three attempts by the LSE to combine with Deutsche Boerse AG. The final plan to sell LSE to Deutsche Boerse to create a US$30 billion behemoth fell apart when regulators blocked the deal in 2017.

Singapore Exchange Ltd.’s US$8.8 billion bid for ASX Ltd. collapsed after the Australian government said the deal wasn’t in the national interest.

European Union regulators vetoed Deutsche Boerse and NYSE Euronext’s plan to create the world’s biggest exchange after concluding that the merger would hurt competition.

Nasdaq OMX Group Inc. and Intercontinental Exchange Inc. abandoned an unsolicited bid for NYSE Euronext in 2011.